Country Report Poland
Being hailed as the only EU country without a recession during the 2008/09 global financial crisis, all eyes are on Poland now that the economy is slowing. Economic growth slowed from 4.3% in 2011 to an estimated 2% in 2012 and is expected to be between 1-2% in 2013. The slowdown is caused by slowing private consumption, a fall in investment growth and weak external demand. Fiscal austerity measures are not helping either, but these are expected to ease in the coming years as the government is nearing its target. However, in the short term, the higher taxes and spending cuts are affecting the popularity of Prime Minister Tusk and the PO-PSL coalition. In a bid to improve their standing, an infrastructure investment program was announced in October. And in February, the agreement on the new EU budget, which includes a continuation of large subsidies for Poland, boosted popularity. The banking sector is feeling the effects of the growth slowdown as NPLs are rising.
Introduction and update
Economic growth in Poland for 2012 is estimated at the lower end of the 2-3% band that was earlier estimated. While the domestic situation was less rosy than in previous year (more on that below), Poland’s external position improved. On the back of the slowing economy, the import bill decreased and the profit repatriation abroad decreased. This had a positive effect on the current account deficit, which decreased from 4.9% of GDP in 2011 to around 3% of GDP in 2012 and 2013. This helped the external debt position to stay at about 60% of GDP. Poland’s liquidity position is supported by the steadily growing foreign exchange reserves and by the IMF decision to approve a two-year extension of Poland’s USD 33.8bn Flexible Credit Line in January 2013. The zloty experienced a rather stable year in 2012, compared to previous years. The currency dipped early 2012, but has gradually appreciated since - largely in line with developments in the eurozone.
Economic growth is slowing
Being hailed as the only EU country without a recession during the 2008/09 global financial crisis, all eyes are on Poland now that the economy is slowing. Economic growth slowed from 4.3% in 2011 to an estimated 2% in 2012. The slowdown was largely seen in the second half of the year. In 3Q, Poland’s economy grew by just 1.4% yoy, down from 3.5% and 2.3% in the first and second quarter respectively. To arrive at the estimated 2% for the full year, 4Q growth would be a meager 0.8%. This would be the slowest growth in more than a decade, except for the first quarter of 2009, at the height of the financial crisis. Data will be released on 1 March. For this year, a further slowdown of full-year growth to 1-2% is expected, while a cautious recovery is expected for 2014. While a growth level around 1-2% is low from a Polish perceptive, it is not alarming in itself. Compared to neighboring countries, Poland is still performing well and the current account balance is improving on the back of weaker domestic demand. However, the rising non-performing loans are something to keep a close eye on. Moreover, in the longer run, Poland will need a growth level above the European average to catch up with income levels in other countries. With a shrinking working age population, this will be challenging and the government will need to address issues like red tape and bureaucracy to stimulate the business environment.
Back to the current economic situation. The slowdown is broad based and stems both from weaker domestic demand and a sluggish external environment – so it is not just the eurozone crisis that can be blamed. Household consumption, the mainstay of Polish economic growth, is estimated to have grown just 0.5% yoy in 2012, compared to 2.5% in 2011. Consumption suffers under a stubbornly high unemployment rate, weak wage growth, higher taxes and tighter credit conditions. With the savings rate gone down well below the 8.5% long-run average, households seem to have eaten into their capital, which does not bode well for a rebound of consumption. A looser monetary policy will provide some space. Investment growth is affected by the construction sector, which has been in doldrums since building projects were finished before the Euro2012 soccer championship last summer. Weaker domestic demand had a dampening effect on imports. So even though exports were rather weak too, the net contribution to growth of external demand was positive over 2012. The fiscal consolidation efforts of the government have resulted in a decline in government consumption. Going forward, fiscal consolidation is expected to slow as Poland is nearing its budget target. This will ease the downward pressure on household consumption.
Poland’s Monetary Policy Council (MPC) cut the borrowing costs by 25bps to a reference rate of 4% at its monthly meeting in January. It was the third consecutive month that the MPC cut its policy rate by 25bps. The latest series of rate cuts signals that Polish authorities are increasingly concerned about a continued economic deceleration. In the next months, the MPC could decide to further cut its policy rate, when economic growth continues to disappoint. However, the inflation level is still slightly elevated and the central bank has expressed that inflation remains important.
The banking sector is feeling the effects of the economic slowdown. Non-performing loans are rising, especially in the corporate loan portfolio. The impaired loan ratio of corporate loans increased 1 percentage point between March and September 2012, to 11.4%. The construction sector, largely connected to infrastructure projects, accounted for more than 50% of the impaired loan growth. The impaired loan ratio for households stayed at 7.5% (end September 2012). Despite the declining asset quality of the banking sector, the sector remains well capitalized and overall liquidity is ample. A positive development is that the share of foreign currency loans has declined from more than 70% of housing loans in late-2008 to a little over 50% mid-2012.
Credible fiscal consolidation
In 2009, the government of Poland set out on a fiscal consolidation track that should bring the fiscal deficit back to 3% of GDP. A combination of tax hikes (e.g. of VAT) and spending reduction brought the fiscal deficit down from 7.9% of GDP in 2010 to 5% in 2011 (Eurostat definition). For 2012, the government is expected to just miss the deficit target of less than 3% of GDP. With the economy slowing more than expected, tax revenues (especially VAT revenues) were below target. On the back of reducing fiscal deficits, the government was able to keep the public debt level below the constitutional threshold of 55% of GDP (local definition). This prevented automatic austerity measures, which would interfere with the gradual approach of Prime Minister (PM) Tusk and the PO-PSL coalition.
The combination of fiscal austerity and a slowing economy has affected the popularity of Prime Minister Tusk and his PO party. Also, Tusk’s son was involved in a scandal around Amber Gold, a non-bank financial institution. In a bid to boost public support, Tusk announced a large scale investment plan in October 2012. This would include investments into railways, roads and power plants and would help to close the gap left by EU funding that has dried up towards the end of the EU budget period. Recently, Tusk scored more points when the EU leaders decided on the new EU budget 2014-20, even though the budget still needs to be approved. Despite these gains, the popularity of Tusk will remain under pressure from the austerity measures and economic downturn. The opposition parties are, however, too fragmented to topple the government at this point in time.
Figure 5: Fiscal situation
Source: EIU, Eurostat
Regarding the new EU budget, Poland is expected to receive slightly more (about EUR 4bn) than in the previous (2007-13) period. An estimate suggests that Poland will receive around EUR 106bn over the period from cohesion and structural funds and the Common Agriculture Policy (CAP). In the past years, the investments done with EU funding have strongly boosted infrastructure improvements and supported economic growth, although the absorption of funds could be faster and more efficient. If absorption of EU funds can be done more efficiently, this will boost economic growth in the short term (more investment) as well as long run (addressing infrastructural issue).